Jane was shopping around for a secondhand car. She didn’t know much about cars, and knew the seller would be unlikely to take her seriously, so she took her boyfriend with her. Unfortunately, he didn’t know much about cars either, but he looked under the bonnet, kicked the tyres, and told her the car looked OK to him.
So she bought it.
However, Jane soon realised it was a dog. Within the first three months, various repairs cost her over £1,000.
She put the car up for sale and told the buyer she was selling it so soon because she was emigrating. Coincidentally, she also got rid of the boyfriend.
The expression ‘caveat emptor’ comes to mind. It means ‘buyer beware’.
“Roll up, roll up! Buy my lovely annuity! One careful lady owner!”
As you may know, there have been lots of changes to pensions recently. For example, people over 55 can now withdraw up to 25% tax-free, and pension-age people no longer have to buy an annuity if they don’t want to.
If you’re already drawing your pension, you might feel a bit hard done by, having missed out on these new freedoms. But there is a change coming for you too.
From April 2017, you will be able to sell your annuity in return for a cash lump sum. Apparently, HMRC expect 300,000 people to take the opportunity.
But is it a good idea?
We think it’s fraught with danger, with limited potential buyers and the risk of being scammed.
Echoes of life settlement funds
Many people invested in Life Settlement funds that bought life assurance policies from individuals in the US. But, in November 2011, the FSA (now FCA) labelled the approach ‘toxic’, ‘high-risk’ and ‘Ponzi’. Hearing this, investors naturally panicked. However, the funds had a liquidity problem because of the nature of the underlying asset, and investors couldn’t withdraw their money.
Similarly, a solo investor is unlikely to buy annuities one by one, because they are taking a risk on each individual’s health. Instead, specialist funds will buy annuities in bulk to spread the risk. Bearing in mind what they said before, we think the FCA is being hypocritical by creating this type of market.
What to do
Like Jane’s dodgy car, we think the secondhand annuity market is a non-starter.
In our opinion, you are unlikely to get good value if you sell your annuity. For a start, the company that sold it to you is not going to buy it back. Your annuity lasts as long as you live, so any buyer will have to analyse your health very carefully (which is a costly exercise). And anyone who does want to buy your annuity will want to make a profit from it, so will only offer you a keen price.
Your pension is therefore likely to take a big hit if you sell your annuity (a bit like the instant devaluation as soon as you drive a new car off the forecourt).
If you’re tempted to sell your annuity, it’s really important to take professional advice, and use the Government’s Pension Wise service.
Remember, annuities still have a place in your financial plan, because you give away the risk. Annuity income is guaranteed for your entire lifetime – depending how long you live, this could be worth a lot.
How long do you expect to live?
If you think you won’t live long after retirement, you need life assurance to protect your family.
If you think you may survive a long time after retirement, you need pensions, investments and / or savings to cover your ongoing living expenses.
Use this Government calculator to predict your life expectancy.
10 considerations from Unbiased.co.uk
- Does your provider allow you to sell your annuity? (Not all of them do.)
- Why do you want to sell it? (There may be another way to achieve your goal.)
- Are you the legal holder? (If it’s not in your name, you’ll have to transfer it first.)
- What is your state of health? (The longer your life expectancy, the higher the value of your annuity.)
- Is it a joint-life annuity? (If yes, your spouse/dependent will need another source of income.)
- What are the tax implications? (Money you make from selling your annuity is subject to income tax.)
- What is your annuity worth? (When you sell, you may lose up to 25% of the value)
- What will it cost to sell? (You’ll have to pay the admin and medical fees.)
- What other income do you have? (You can’t just rely on the State pension.)
- Have you taken independent advice? (You may be required to by law.)